A new kind of IPO structure, called a “Form 10 IPO,” can provide an alternative path to capital and public trading for smaller companies without significant revenue in high-risk industries, such as life sciences. Although not an IPO in the usual sense, a Form 10 IPO may be the most practical route to going public for some companies.
The traditional IPO route can be difficult. Given the length of time it takes to complete the overall IPO process, there is significant risk that market conditions will change between the time a company begins the process and the time it is ready to market the offering to investors. In addition, it can be challenging for companies with limited operating histories to gauge their valuations, even as late in the process as during the road show, causing some companies to price their IPOs well below the estimated range, or even to abandon the effort despite having already invested significant time and expense in the process.
In response to these factors, the Form 10 IPO has emerged as an alternative to a conventional IPO. Previously, various forms of reverse-merger transactions had been the primary means for life science companies to go public if they could not complete a traditional IPO. Following the adoption of tightened stock exchange listing standards for reverse-merger companies, the Form 10 IPO has become a more desirable alternative.
What is a Form 10 IPO?
In a Form 10 IPO, a private company sells securities in a private placement under Regulation D and, in connection with the private placement, agrees to file a Form 10 registration statement to become a reporting company under the Exchange Act and to file a Form S-1 registration statement registering for resale the shares sold in the private placement. Typically, a Form 10 IPO company will arrange to have its stock quoted on an over-the-counter market and later seek to have its shares listed on a national securities exchange once it satisfies the applicable listing standards.
Advantages and Disadvantages
The principal advantage of a Form 10 IPO is that it can provide a company with significant capital more quickly than a conventional IPO. The following aspects of the Form 10 IPO process contribute to its advantages:
- the price at which the company raises capital is negotiated up front with the investors in the private placement;
- the SEC review process does not occur until after the sale of the securities;
- institutional investors that ordinarily invest only in public companies may be willing to invest in a Form 10 IPO private placement; and
- much of the time, cost and expense associated with public company preparations can be deferred until after the company has received the capital.
While these advantages may be very meaningful for some companies, there are also several disadvantages to a Form 10 IPO, including:
- it may be difficult for a smaller company to comply with its public reporting obligations under the Exchange Act, which become applicable as soon as the Form 10 becomes effective;
- the company may encounter difficulty in satisfying the public float and round-lot stockholder requirements for stock exchange listing;
- the elapsed time from the sale of the securities to trading on a stock exchange—the ultimate goal in a Form 10 IPO—may be no shorter than in a traditional IPO;
- if the company’s stock trades below $5.00 per share and is not listed on a national securities exchange, the company will be subject to the SEC’s “penny stock” rules, which could make it more difficult for broker-dealers to execute trades in the stock;
- the aggregate legal and accounting expenses incurred in connection with a Form 10 IPO will likely be as much, if not more, than those associated with a traditional IPO;
- the placement agent’s fees may be based on a higher percentage of the financing proceeds than the percentage underwriting discount in an IPO, and the company may also need to issue warrants to the placement agent as additional compensation;
- research coverage may be more difficult, and perhaps impossible, to obtain;
- major investment banks may be less likely to underwrite the company’s follow-on offerings because they did not have the opportunity to become familiar with the company during a conventional IPO process;
- the intangible benefits of enhanced prestige and credibility provided by conventional IPO will be delayed, or not present at all; and
- because the JOBS Act does not permit Form 10 registration statements to be submitted for confidential SEC review, an emerging growth company’s plans to pursue a Form 10 IPO will become public knowledge as soon as it files the Form 10.
The Form 10 IPO offering process has multiple steps:
- Pre-Financing Preparation: The Form 10 IPO process typically begins with the company’s engagement of an investment bank. Once the investment bank is selected and engaged, the company and the bank will determine the appropriate path and timeline for the company’s process. The investment bank will also act as placement agent in connection with the initial private placement.
- The Private Placement: The company and placement agent will work together to identify investors and negotiate the private placement, which is completed pursuant to the exemption from registration provided by Regulation D. The securities sold in the financing can consist of shares of preferred or common stock, and will be sold pursuant to a stock purchase agreement. In addition to normal private placement terms, the stock purchase agreement will include the company’s commitment, following the financing, to file a Form 10 registration statement to become a reporting company and to arrange to have its shares traded on an over-the-counter market and/or listed on a stock exchange.
- Public Company Preparation: The company will become subject to the Exchange Act reporting requirements on the day the Form 10 becomes effective. As a reporting company, the company will be required to file Form 8-Ks, 10-Ks and 10-Qs. In addition, insiders and 10% stockholders will be required to file Form 3s and 4s, and 5% stockholders will be required to file Schedule 13Ds or 13Gs. Therefore, the company should begin its public company preparations, which are similar to those of a private company pursuing a traditional IPO, at the time of the private placement.
- Governance Preparation for Stock Exchange Listing: Since the eventual goal of the Form 10 IPO process is for the company’s stock to be listed on a national securities exchange, the company must determine early in the process how it plans to satisfy the applicable listing standards. Particular consideration should be given to the non-affiliate float and round-lot stockholder requirements. In addition, because the phase-in rules applicable to companies listing on a stock exchange in connection with an IPO are not available to a company going public through the Form 10 IPO process, the company must be prepared to be fully compliant with the director independence and committee composition requirements at the time it seeks listing.
- Form 10 Registration Statement: The Form 10 registration statement contains information similar to that required in a Form S-1 registration statement, with the exception of information specific to the securities offering. The SEC review process is also similar to the Form S-1 review process—the SEC will review and provide comments on the Form 10 registration statement and the company will respond to the SEC’s comments through response letters and Form 10 amendments. However, unlike a Form S-1, the Form 10 will automatically become effective 60 days after filing, unless withdrawn by the company. In the event significant issues remain unresolved as the date of effectiveness approaches, the SEC may request that the company withdraw the registration statement prior to effectiveness, or the company may elect on its own to do so. If the company does withdraw the Form 10, whether at the request of the SEC or on its own, a new 60-day clock will begin when the Form 10 is refiled.
- PIPE Financing: To comply with the securities exchange listing standards, which require that a company have a minimum number of round-lot stockholders and a minimum amount of non-affiliate public float, a Form 10 IPO company may determine to conduct a PIPE financing after the Form 10 becomes effective. A primary goal for the PIPE financing will be to increase the company’s non-affiliate stockholder base.
- Resale Form S-1: After the Form 10 has cleared SEC comments and gone effective, the company will draft and file with the SEC a resale Form S-1, registering for resale the shares sold in the private placement and the PIPE financing, if any. The purpose of the resale Form S-1 is to provide liquidity to the investors and to facilitate trading in the stock.
- Over-the-Counter Trading: A Form 10 IPO company usually will be unable to satisfy the applicable standards for listing its stock on a securities exchange immediately following effectiveness of the Form 10. Instead, the company will likely arrange through a broker-dealer, usually the investment bank assisting the company with its Form 10 IPO, to have the company’s stock quoted on an over-the-counter system. Over-the-counter trading provides liquidity for the company’s investors as well as an opportunity for the company to increase its non-affiliate stockholder base and otherwise progress towards satisfying the stock exchange listing standards.
- Stock Exchange Listing: Once the company satisfies the applicable listing standards, including the director independence and committee composition requirements for which there is no grace period in the context of a Form 10 IPO, the company may list its shares on a stock exchange.
For companies that anticipate having a difficult time successfully marketing, pricing and completing a traditional IPO, a Form 10 IPO may be appealing. However, a Form 10 IPO is not feasible for all companies and, even for those companies that are in a position to take advantage of the benefits, there is the fundamental tradeoff of time to capital versus time to market, liquidity and access to additional capital.
To date, few companies have completed Form 10 IPOs, and the extent to which this market will broaden remains to be seen. Interest may grow as the process becomes better known among IPO candidates and potential Form 10 IPO investors. Moreover, the JOBS Act’s mandate to eliminate the prohibition on general solicitation and general advertising in private placements conducted pursuant to Rule 506 under Regulation D, once implemented, may help companies identify investors for private placements and PIPE financings in conjunction with a Form 10 IPO. In any event, a Form 10 IPO should remain a possibility for some private companies that seek public investor capital but are looking to avoid the market fluctuation and pricing risks associated with raising money through a traditional IPO.